820 F.

2d 1161

Samuel S. DUFFEY, Individual, David Deserio, Individual,

Plaintiffs-Appellants,
v.
D.C. WHEELER, Individual, H. Thomas Hirsch, Individual, H.
Thomas, P.C., a Texas Professional Corporation,
Challenge Energy, Inc., a Florida
Corporation, Defendants-Appellees.
No. 86-3577.

United States Court of Appeals,

Eleventh Circuit.
July 2, 1987.

George LaMarca, Williams, LaMarca, Marcucci, Wiggins & Anderson,

P.C., West Des Moines, Iowa, Richard S. Webb, IV, Duffey, Judd, Webb
& Wood, P.A., Sarasota, Fla., for plaintiffs-appellants.
Ronald Alexander Cyril, Michael A. Connolly, Nelson, Hesse, Cyril,
Smith, Widman & Herb, Sarasota, Fla., for defendants-appellees.
Appeal from the United States District Court for the Middle District of
Florida.
Before GODBOLD and ANDERSON, Circuit Judges, and SWYGERT* ,
Senior Circuit Judge.
ANDERSON, Circuit Judge:

Jurisdiction of this shareholders derivative action is based solely on diversity of

citizenship. In this case, we are asked to decide whether a corporation in a
shareholder's derivative action should be realigned as a party plaintiff for
diversity purposes when the corporation management is deadlocked.

Challenge Energy, Inc. is a Florida corporation. Plaintiffs Duffey and DeSerio

are Florida citizens. Defendants Wheeler, Hirsch, and H. Thomas Hirsch &

Associates, P.C. are Texas citizens. It is the status of Challenge Energy for
purposes of determining diversity jurisdiction that is at issue in this case, that
is, although the corporation was named as a nominal defendant in the
complaint, plaintiffs assert that the corporation should be realigned as a party
plaintiff.
3

Duffey owns 17.5% of the outstanding capital stock of Challenge Energy and
serves as the corporation's Vice President and Secretary. Wheeler controls
77.5% of the outstanding capital stock and serves as President of Challenge
Energy. The corporation has only the two officers and the same two persons are
the sole directors. The by-laws provide for a quorum at shareholders meetings
of 85% of the shares entitled to vote. Thus, the corporation cannot undertake
any action absent an agreement between Duffey and Wheeler. That is, the
directors are split evenly, Duffey on one side and Wheeler on the other.
Similarly, the shareholders are deadlocked since there can be no quorum
without Duffey's 17.5%.

Plaintiffs Duffey and DeSerio filed their complaint in federal court, alleging
that any request of the corporation to undertake this action in its own behalf
would be futile because management of the corporation was deadlocked.
Plaintiffs further alleged that the management's division did not make
Challenge Energy antagonistic to the plaintiffs, but merely incapable of
undertaking the action on its own behalf. Thus, plaintiffs maintain that naming
Challenge Energy as a defendant was a mere formality and that the corporation
remained the real party in interest throughout the course of the proceedings.

Defendants Wheeler and Challenge Energy failed to respond to the complaint

and a default judgment was rendered against them. Defendants Hirsch and
Hirsch & Associates, P.C. filed motions to dismiss for lack of subject matter
jurisdiction. Plaintiffs filed a motion to realign defendant Challenge Energy as a
party plaintiff. The district court denied plaintiff's motion to realign and granted
the motion of defendants Hirsch and Hirsch & Associates, P.C. to dismiss for
lack of complete diversity. Plaintiffs appeal from this ruling arguing that in all
cases except those in which a corporation is actually controlled by management
antagonistic to the plaintiffs the corporation is realigned as a party plaintiff. We
agree.

Precedent persuades us that retaining the corporation as a party defendant in a

shareholder's derivative action is an exception to the general rule that the
corporation is properly realigned as a plaintiff since it is the real party in
interest. Koster v. Lumbermens Mutual Casualty Co., 330 U.S. 518, 522-23, 67
S.Ct. 828, 831, 91 L.Ed. 1067 (1947) (general rule is that shareholder's

derivative action "is not [the shareholder's] own but the corporation's. It is the
real party in interest and he is allowed to act in protection of its interest
somewhat as a 'next friend' might do for an individual, because it is disabled
from protecting itself."); Smith v. Sperling, 354 U.S. 91, 96-97, 77 S.Ct. 1112,
1116, 1 L.Ed.2d 1205 (1957) (exception applies whenever antagonism is
evident on the face of the pleadings and by the nature of the controversy. Such
antagonism exists where "it is plain that the stockholder and those who manage
the corporation are completely and irrevocably opposed."). This exception has
been narrowly constructed. Taylor v. Swirnow, 80 F.R.D. 79, 83 (D.Md.1978).
Cases in which courts have condoned retaining the corporation as a party
defendant occur only where the corporation has been found to be "actively
antagonistic" to the plaintiff's interests. Swanson v. Traer, 354 U.S. 114, 77
S.Ct. 1116, 1 L.Ed.2d 1221 (1957); Reilly Mortgage Group v. Mt. Vernon
Savings & Loan, 568 F.Supp. 1067 (E.D.Va.1983); Rogers v. Valentine, 306
F.Supp. 34 (S.D.N.Y.1969), aff'd, 426 F.2d 1361 (2d Cir.1970). Conversely, in
instances which are factually similar to the case at hand, i.e., cases in which the
corporation's management or its shareholders are deadlocked with respect to a
particular issue, courts have realigned such corporations as party plaintiffs.
Liddy v. Urbanek, 707 F.2d 1222 (11th Cir.1983); Kartub v. Optical Fashions,
158 F.Supp. 757 (S.D.N.Y.1958). Mere inaction, or inability to act on the part
of the corporation, because of a deadlock between those who control the
corporation has not been found to be the equivalent of active antagonism. Id. at
758-59.
7

The judgment of the district court is accordingly reversed and remanded for
proceedings not inconsistent with this opinion.

REVERSED and REMANDED.

Honorable Luther M. Swygert, Senior U. S. Circuit Judge for the Seventh

Circuit, sitting by designation